Ramifications on Walking Away from a Refinanced Loan

[mpfxtrader]

Hi,

I need some help on understanding the ramifications of walking away from a refinanced loan. I did some research and found some information and just want to verify with some of the experienced folks here in this forum.

Here goes my situation:

- Mortgage Upside Down - Almost $200K Underwater
- Current Value - $365K
- Current Loan Balance - $555K - 30Yr Fixed @ 6.625
- Property Location: Vacaville, California
- Lender: Homecomings Financial
- Loan Type: Refinanced (2007)
- P+I = $3,700.00
- Escrow/Impounded = $1,200.00 (PMI, Tax, & Insurance)
- Total Monthly Mortgage: $4,800.00
- Just One Loan no 2nd or HELOC

We have decided to walk away and will just rent for the next 5 - 7 years till the foreclosure records gets cleared from our credit report and just save the money while we are renting. So, effective next month we will not be paying anymore.

So, here are my initial questions and hopefully you guys have some answers.

1. Since, this is a refinanced loan which makes it recourse, how often do you think lenders go through the judicial proceedings instead of non-judicial so they can pursue the deficiency amount? I was told by a lawyer that if you’re a high wage earner and have some assets they will go after you.

2. What are the things we can do to protect those assets if in case they go through judicial proceedings?

3. How do we deal with the lender when they start calling? Since this is not hardship do I just avoid them or tell them I don’t really have any plans on paying my mortgage anymore? Will this actually even provoke them to pursue judicial proceedings?

4. Would hiring an attorney make more sense? If so, how much do you think will it cost me? What about those services from walkaway.com or mortgagedefaultlegalteam.com?


Appreciate all the input you can give.

Thanks,
mpfxtrader

[ProfessorShays]

Welcome to the forum. From a practical standpoint, I simply cannot recall a situation where a lender relative to California residential real estate of modest value (here in California your home would qualify for that characterization), followed the path of judicial foreclosure. That doesn't mean it can't happen. It simply means that it is extremely unlikely. In terms of qualifying to make that observation, I've been closely involved in the process since the early '70s.

Having said that, let me briefly focus on your questions.

1. Since, this is a refinanced loan which makes it recourse, how often do you think lenders go through the judicial proceedings instead of non-judicial so they can pursue the deficiency amount? I was told by a lawyer that if you’re a high wage earner and have some assets they will go after you.

The key reason lenders do not go through the judicial process has more to do with time and the potential lack of recovery against the defendant for a deficiency. Judicial foreclosures take a lot more time, cost more money (in terms of legal fees and costs), and they have that ugly post-foreclosure borrower "right of redemption" which can effectively make the property unmarketable for a year after foreclosure. Heck, they can't even do non-judicial foreclosures effectively (taking over a year to do what can be accomplished in 4 months).

2. What are the things we can do to protect those assets if in case they go through judicial proceedings?

This is more about converting non-exempt assets into exempt asset categories. If necessary you will have plenty of time to prepare. I just wouldn't worry about it unless the unlikely event of the lender going the judicial foreclosure route occurs.

3. How do we deal with the lender when they start calling? Since this is not hardship do I just avoid them or tell them I don’t really have any plans on paying my mortgage anymore? Will this actually even provoke them to pursue judicial proceedings?

Let them know that you are in a tough spot and don't know what to do and can't afford to make the payment. Don't seek a modification because they will want you to provide financial information if you go down that path.

4. Would hiring an attorney make more sense? If so, how much do you think will it cost me? What about those services from walkaway.com or mortgagedefaultlegalteam.com?

Hire a lawyer for two purposes. First to advise you as to what I've stated above. Second to help you ascertain the tax consequences. From the information you've provided it is not possible to identify potential income tax consequences although they may very well be there depending upon information not provided.

Stay away from foreclosure consultants. I've pointed people in the past to California Civil Code Section 2945. I can't say it better than the Legislature did in sub-section (a):


2945.(a) The Legislature finds and declares that homeowners whose residences are in foreclosure are subject to fraud, deception, harassment, and unfair dealing by foreclosure consultants from the time a Notice of Default is recorded pursuant to Section 2924 until the time of the foreclosure sale. Foreclosure consultants represent that they can assist homeowners who have defaulted on obligations secured by their residences. These foreclosure consultants, however, often charge high fees, the payment of which is often secured by a deed of trust on the residence to be saved, and perform no service or essentially a worthless service. Homeowners, relying on the foreclosure consultants' promises of help, take no other action, are diverted from lawful businesses which could render beneficial services, and often lose their homes, sometimes to the foreclosure consultants who purchase homes at a fraction of their value before the sale.

Daniel

[mpfxtrader]

Professor,

Thanks for the quick reply and really appreciate the info you have provided.

For the tax consequences, I have looked at the IRS link from this site Home Foreclosure and Debt Cancellation regarding home foreclosure and cancellation of debt and from what my limited mind understands from this publication especially with these statements:

"If you have owned and used the home as your principal residence for periods totaling at least two years during the five year period ending on the date of the foreclosure, you may exclude up to $250,000 (up to $500,000 for married couples filing a joint return) from income. If you do not qualify for this exclusion, or your gain exceeds $250,000 ($500,000 for married couples filing a joint return), report the taxable amount on Schedule D, Capital Gains and Losses"

We have been in the house for over 5 years so I can exclude up to $500K since we are married couples filing jointly.

Here's what I used for my computation:

Current Loan Balance: $555K
Basis Points (Purchase Price plus improvements): $355K
- Purchased Price of $300K
- Home improvements (Swimming Pool, & eetc.): $55K
Foreclosure Gains: $ 555K - $355K = $200K

So, since the gain is less than $500K (which is the amount I can exclude), I will not be paying any taxes on this $200K.

Is my assumption correct based on this publication?

[ProfessorShays]

Good question for which I will purposely avoid answering. I find tax law especially boring, unfair, non-intuitive (probably because of its unfairness), and wrongfully favoring form over substance. Applying logic (which is the way you presented it) leads me to believe your conclusion is correct. Problem is logic doesn't work when it comes to tax law.

Daniel

[tryingtostay]

1. Since, this is a refinanced loan which makes it recourse, how often do you think lenders go through the judicial proceedings instead of non-judicial so they can pursue the deficiency amount? I was told by a lawyer that if you’re a high wage earner and have some assets they will go after you.

Some lawyers use scare tactics so you will hire them. Some are being bluntly honest on the possibilities of what could happen. Do your research, read examples, and prepare yourself so you will know what to expect in a worst case scenario.

2. What are the things we can do to protect those assets if in case they go through judicial proceedings?

Again, do your research. You are your best advocate. Read through the forums here and see what has happened to others with recourse loans. Look through the web; there are millions of stories, I'm sure you'll find some reassurance.

3. How do we deal with the lender when they start calling? Since this is not hardship do I just avoid them or tell them I don’t really have any plans on paying my mortgage anymore? Will this actually even provoke them to pursue judicial proceedings?

Personally, I utilized my caller ID and just stopped answering. (Not the best approach, but the easiest for me. First calls started when I was getting ready for the day, then they called at baby's naptime, lunch time... always busy times!) Other people pick up the phone and just say "I don't have the money this month, please don't call back." Others are brutally honest and tell the lenders they are leaving.

4. Would hiring an attorney make more sense? If so, how much do you think will it cost me? What about those services from walkaway.com or mortgagedefaultlegalteam.com?

Yes, hire an attorney. An hour consult will cost you $100-350. Maybe more; you are in No Cal. But it's certainly cheaper than one month of mortgage payments.

Have you read through this website? The Mortgage Forgiveness Debt Relief Act and Debt Cancellation

The Mortgage Forgiveness Debt Relief Act even forgives your mortgage debt for refinancing, to the extent of the funds that were used soley for home improvements. (I'd definately hire an experienced CPA to do your taxes when the foreclosure finishes).

The Professor could correct me here but you COULD possibly not even foreclose until next year. Companies aren't rushing through foreclosures. If your company was fast it would be Nov/Dec, but I wouldn't be surprised if it wasn't until at least Jan 2010.

[mpfxtrader]

I hear you Professor.

As always, I appreciate the response and I hope you don't get tired answering the question here on this forum.

This really helps me a lot in trying to gather information regarding my situation. I am pretty sure I will have more questions in the future and I am glad I stumble upon this forum.

Thanks again.

[mpfxtrader]

Thanks Tringtostay, I will definitely do more research especially on trying to find reassurance as you mentioned, especially with my wife she really want some reassurance that the lender will not go after us for the deficiency.

I would just like to compile all my questions first before consulting an attorney and so far I only have few questions that's on my list and most of them have been answered here on this forum.

So, any other questions that I can put on my list that you think could be related to my case would be greatly appreciated so my meeting with the attorney would be more productive.

Thanks again.

[kent302]

Trader, there should be no taxes owed at least from the IRS.
What about CA state taxes?
I read the matching program for tax forgiiveness ended on 1/1/09 and the max amount was half of the IRS.
I am not sure about the status of the state program, so if I would like to find out myself if you learn more.
Kent

[KT in CA]

There are 2 possible taxable events. The first is cancellation of debt income, which is the amount the lender sends you a 1099 for after the foreclosure (difference between FMV of home or what home sells for at auction and balance of your loan). Second is capital gains, which you talked about earlier. Sounds like there will be no capital gains to worry about, but you may have taxable income due to debt cancellation. Read the IRS page again and you will see they list these two as separate issues.

We are in Vacaville as well. We refinanced several times since we bought our home in 2000 and pulled cash out, so we will have to go the insolvency route to have our 1099 income cancelled on our tax return for 2009. I don't know if you pulled cash out, and I'm unclear on how the 1099 income will be treated if it was a refinance with no cash out. I don't know whether the loan loses it's non-recourse status or not. If it does, then I believe you will have taxable income with the debt cancellation 1099.

As far as state tax relief, there is none yet. Apparently it is going to be revisited soon to possibly extend it. If you search this site you will find threads devoted to this discussion.

I noticed you listed that you have PMI. If the lender follows the one action rule and does a non-judicial foreclosure, they cannot come after you for the deficiency. And the PMI company can't either, according to the Professor. They have no great rights than the original lender. When I spoke with my attorney about this in December he said that he has NEVER seen a lender follow a judicial foreclosure for a personal residence. We know several people who have been foreclosed on and they all have been non-judicial.

Best thing to do is consult a CPA / tax attorney for advice on the tax part of it. We are seeing one after tax season for this year is over to get some advice.

Hope this helps.

KT

[mpfxtrader]

KT,

Thanks for the info.

Yes, we pulled some cash out to do a lot of home improvements such as constructing a new pool, landscaping, etc. So I guess we might need to go the insolvency route to get exclsuion on taxes for the debt cancellation.

I did read the IRS publication again and it seems you are right there's actually 2 taxable events with my case. Thanks for pointing that out, I guess I will definitely seek a CPA/Tax attorney (anybody you can recommend in this area ). Now, I also have to think about the taxes for the CA state too, I forgot about that.

Thanks again and all these info really helps.

[Dizzle831]

mpfxtrader,

We are almost in an identical situation (i refi'ed twice) and thank goodness we live in CA. I missed my March payment and basically counting down the days until i start getting the calls. I could afford to stay but dont see any reason to with my home being under by 60%+(owe 419k current value 160k). Lets just keep our fingers crossed CA amends that Tax Relief Act.

KT, when you are referring to "taxable income due to cancellation of debt", are you talking about non-purchase money as part of the 1099c?

[KT in CA]

Yes. If it's a purchase money loan and non-recourse and you get a 1099 then you don't have to worry about it. But if it's not purchase money and is recourse, then you do. Now, I don't know how to go about separating out what is and isn't purchase money. I think if you can prove some of the money was used for home improvements then you can exclude it. But you will need a CPA/tax attorney to clarify that for you.

I believe you can claim insovency with CA tax law as well, but don't quote me on that. I have done hours of online research regarding the taxes because we aren't protected under the MFDRA, and it seems that I read somewhere that you could. But again, I'm just not positive.

Trader...it doesn't sound like you will have to worry about taxes on capital gains, just the 1099 income possibly. I think our capital gains will be about $200k as well so we don't have to worry about that part of it either.